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Pay Yourself First

You want to pump money into that burgeoning business of yours, but the mortgage has to be paid. How do you strike a balance?

Keeping a Cash Flow
The best practice is to have start-up money to begin your business, so that from the very start you have an automatic cash flow from money invested in your business.

You should also set terms for collections. Collect your money in a maximum of 30 days. Keep the terms short so that as soon as you do the work, you’re getting paid for the work. The only way to successfully pay yourself first is to get money from your clients quickly.

How Much Salary Should You Pay Yourself?
Base your salary upon two things:

First, if you were working for someone else in the industry in a comparable position, what would the salary be?

Second, what can your company afford to pay you? Figure that salary level into the business plan so that your projections for revenue would allow you to get that salary. Make sure your revenue projections include that. If not, you will be working for yourself at less than what someone else could pay you—and that may not be worth it!

Get Expert Help
While you’re determining your salary, be sure to visit an accountant and determine how much should be paid in taxes, and how often.

Don’t Forget To Save For a Rainy Day . . .
Once you’ve made sure that you are paying yourself enough, be sure to have enough money in the business for emergencies.

Research the best practices in the industry. If you’re a consultant with low overhead, a quarter’s cash reserve could be enough to tide you over. If you’re in a business with inventory, or if you have employees, you should have a six-month cash reserve.